Title

Profitability regulation, earnings management, and modified audit opinions : evidence from China

Document Type

Journal article

Source Publication

Auditing

Publication Date

9-1-2001

Volume

20

Issue

2

First Page

X

Last Page

30

Keywords

Accounting regulations, Modified audit opinions, Target profit levels

Abstract

This study, using data from the Chinese stock market, investigates the relationship between earnings management induced by profitability regulation and modified audit opinions (MAOs). We review recent developments in the accounting profession and in independent auditing to foster an understanding of the environment in which Chinese auditing operates. Based on annual reports published by listed companies from 1995 to 1997, we analyze the underlying reasons for MAOs. Our test results show a significant association between receiving MAOs and reporting profits marginally above the target levels specified in stock de-listing and rights offering regulations. Our findings are consistent with the notion that asymmetric profitability requirements exacerbate managers' propensity to engage in earnings management, which in turn is positively associated with receiving MAOs. Though based on Chinese data, our findings are of general interest because they address a fundamental issue of trade-offs between expected costs and expected benefits in deciding whether to avoid MAOs in a transitional economy.

Print ISSN

02780380

Publisher Statement

Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Language

English

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